So, you’ve decided it’s time to stop paying someone else’s mortgage. Where to start?? This is the first of a series of articles I will be writing to help get you started on the path to home ownership. We will be starting at the beginning of process and carry on through to the final stages of the actual purchase. I’ve broken the process into 5 steps:
- Getting the down payment
- The “Ins and Outs” of mortgages
- Shopping for a home
- The process of purchasing
- Maintaining value and the sale of your home
STEP 1: Getting the down payment, do I need one??
For most people, the amount paid in rent is about the equivalent of what they could be paying on a mortgage. So if you are able to afford, say $700 a month going to your landlord, why not pay yourself and use the $700 towards a mortgage instead? Monthly payments are not the problem for most would be first time purchasers. The headache comes from getting that all important down payment together. In this article we are going to cover some methods to save money with the goal of getting that down payment quickly and without sacrificing too many small luxuries.
You won’t miss what you don’t see... Many banks offer pre-set scheduled withdrawals with their online banking. This is one quick and easy way to set aside money every payday into your savings or alternate account that won’t encourage those impulse spending habits made so easy by interac, debit, or easy access cards.
Sometimes we are living outside of what we NEED. You might be able to build a down payment by re-arranging your lifestyle in simple ways. Perhaps selling your current gas guzzling beast of an SUV for a more economical city car, cutting down on dining out to once or twice per week instead of three or four, how about those $5 lattes every morning? Even quitting smoking might help you save the money to build a down payment.
This may sound VERY unattractive BUT it is a means to an end. You’re down payment can add up a lot quicker than you think. Currently minimum wage in BC is $8.75; let’s assume a serving shift at your local pub is 8 hours (before taxes) which adds up to approximately $70 earned in wages plus around 40$ in tips. That is 110$ a day. This may seem small but when you crunch all the numbers you end up with ($110 X 48 (shifts in a year) = $5280)! This will definitely get you on your way to collecting a down payment and is TEMPORARY in the scheme of things.
The government has set up a great program for first time buyers called the “Home Buyers Plan” (HPB). This plan allows a first-time buyer is able to take out their RRSPs without being taxed. This is a one-time deal available for first time buyers only, so unfortunately if you have already purchased a home in the past this option is not available to you. Full details on the program can be found here at: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html .
Some of the basic points of this program are that your RRSP has to be in the bank for 90 days before it is eligible, you are allowed to take up to $25,000 from your RRSP that MUST be paid back in equal payments over the next 15 years. This is a great option that allows you to have your cake and eat it too! At the end of the process you will have your own home building equity AND you will still have your RRSPs.
This option may take a couple of years, and may be a longer commitment than initially planned but as the saying goes “Rome wasn’t built in a day”.
Ask Your Family:
The bank of “Mom and Dad” might be willing to help you out but you never know if you don’t ask! Most parents will say things like “I wish that I had bought earlier” or something with the same sentiment, so they might be more receptive to this request then you might think.
This mortgage product is another viable option. With this type of mortgage a lender will granted with a percentage in cash to be used at your discretion. In this case, it could be used as a down payment on your new home. This product usually comes with a higher interest rate so one should be prepared for that; however, putting up with higher interest rates for a small period could be worth it if you are having troubles getting into the market. There are many aspects of this product but a mortgage specialist can tailor different options to individual circumstances and what you are comfortable with.
There are many different avenues and combinations of ways to build money for a down payment for a home. Many of them are a little extra work BUT will pay dividends later on. Don’t lose sight of the long term goal and reward instead of the short term. Most people that become home owners never return to renting again. In the long run, the equity you build from owning your home might be able to bring you the option of owning the second or third property that could PRODUCE INCOME from renters. *wink*
There is no single method that can do it all. Of course, the best way is to do what’s right for you and the financial risks you’re comfortable taking but you might be surprised at what options are available to you. The above are just a few ways to start on the journey to home ownership, on to Step 2!